Preparing to Sell Your Business
Sterling Hein is a business lawyer at Bell Alliance whose corporate & commercial practice focuses on Vancouver business purchases, Vancouver business sales, B.C. company incorporations, share transactions, corporate reorganizations, family trusts, and contract creation and review.
Every so often we meet with a client who is looking to retire from their company by selling her business. This client will ask us if we know any potential buyers, and sometimes we have a few people in mind. However, finding a buyer shouldn’t be the first step in preparing to sell your business. Just like getting a new job, landing an interview isn’t the first step; you’ve got to do some leg work to make yourself appear as enticing as possible. Here are 11 steps to assist small-to-medium-sized business owners in making their business enticing to potential buyers before and during negotiations.
Get Ready in Advance
Last minute preparations lead to disorganization and can mean that a buyer is willing to pay less for your business. You should begin planning for sale at least 2 years before you intend to leave the business so that you can clean up operations to make it as turn-key as possible. It isn’t always practical to begin preparations 2 years before you want to sell – the need to sell can arise quickly – but the key point is that you want to spend time in making the business look appealing to prospective buyers.
Build Marketable Business Attributes
Most buyers are primarily going to be interested in a business’ ability to make money. If your business hasn’t been profitable, you should find a way to turn your numbers around and begin establishing recurring or repetitive revenue. Beyond that, having an effective management team in place will ease the transition to a new owner and hopefully reduce the new owner’s workload at the outset.
Contracts & Financials
An offer to purchase a business is almost always subject to a reasonable due diligence period whereby the buyer’s lawyer and accountant will review contracts and financial statements of a business in order to discover undisclosed liabilities. This period can be the make or break period so it’s important that you’re prepared to clear this hurdle. You should hire a lawyer to review active contracts for possible pitfalls and hire an accountant to ensure you have properly-prepared business financial statements.
Seek out professional advisors with experience in business acquisitions that can help you place a value on your business for sale. Think about what weaknesses your business might have and whether those advisors can create a solution to patch any weakness you discover.
There are a lot of valuation techniques when it comes to businesses. Buyers will choose low valuation; sellers will choose high valuation. The argument can become circuitous. Try to save your money and forego a formal valuation because at the end of the day, the right price is the price you can live with.
Put together a binder of documents pertinent to your business that is easily navigable for potential buyers. The binder should include operations details, product and service information, financial statements, active contracts, suppliers, and competitors. This can be time consuming so leave yourself 1 – 4 months to complete it.
Find a Buyer
Use your extended networks, real estate agents specializing in business transactions, business brokers, professional advisors, and simple advertising (e.g. Craigslist) to find people interested in buying your business. You may want prospective buyers to sign a confidentiality agreement before you disclose to them all of the information about your business. Be careful – sometimes competitors will shop around in order to find out what you’re doing differently from them and try to take away your customers.
Letter of Intent
When a prospective buyer decides to make an offer, it will often be in the form of a letter of intent. This is usually a non-binding agreement which settles some of the details in terms of price, structure, and transition plan. Try to hammer out as many details as you can in this letter and seek professional input from your lawyer and accountant.
Completing the Sale
You will need a lawyer to help you complete the sale of your business and this process will usually take some time – anywhere from weeks to months, depending on the complexity. Generally speaking, the buyer’s lawyer will prepare a purchase agreement that sets a completion date sometime in the future. You and the buyer will sign this agreement and then each of your lawyers will work towards completing the transaction on that date.
Delivering the Business “Free and Clear”
The contract of purchase and sale for your business will almost always require that you deliver the business free and clear of any encumbrances. This means that any debts the business has must be paid out. This includes lines of credit, loans, taxes, workers’ compensation fees, lawsuits, and credit cards. Once your lawyer receives the sale proceeds, he or she must pay any outstanding business debts off before you see any of the money. Try to compile a list of debts owed by the business (or by you personally, if your business is a sole proprietorship), that might reasonably have to be paid out on completion. Business sellers are often surprised by the amount of money that is paid out to creditors before they see a cent.
Sell Assets or Shares?
If your business is incorporated, then you have a decision to make: do you sell your business by selling the shares in the incorporated company, or do you sell the assets used in the business? Generally speaking, sellers want to sell the shares in the company to limit their future liability and take advantage of the small business capital gains tax exemption. Buyers generally want to buy assets which can limit their liability and often will give them the ability to depreciate the purchased assets. What you choose to do will depend on: 1) negotiation with the buyer; 2) your accountant’s advice; and 3) your lawyer’s advice.
If this article was helpful and you have more questions, you can contact Sterling by email at firstname.lastname@example.org or by calling Bell Alliance at 604.873.8723.